NOTE 4 – CREDIT QUALITY ASSESSMENT

Allowance for Loan and Lease Losses

Summary information on the allowance for loan and lease loss activity at the dates indicated ended is provided in the following table:

	Nine Months Ended
	September 30,
(In thousands)	2011			2010
Balance at beginning of year	$	62,135		$	64,559
Provision (credit) for loan and lease losses		(854	)		23,585
Loan and lease charge-offs		(12,612	)		(23,969	)
Loan and lease recoveries		1,051			3,107
Net charge-offs		(11,561	)		(20,862	)
Balance at period end	$	49,720		$	67,282

The following table provides information on the activity in the allowance for loan and lease losses by the respective loan portfolio segment for the period indicated:

	For the Nine Months Ended September 30, 2011
				Commercial Real Estate															Residential Real Estate
										Commercial
	Commercial			Commercial			Commercial			Owner									Residential			Residential
(Dollars in thousands)	Business			AD&C			Investor R/E			Occupied R/E			Leasing			Consumer			Mortgage			Construction			Total
Balance at beginning of year	$	12,870		$	18,241		$	4,793		$	8,177		$	667		$	4,231		$	10,396		$	2,760		$	62,135
Provision (credit)		(3,328	)		(8,947	)		493			(647	)		1,042			3,229			4,967			2,337			(854	)
Charge-offs		(2,146	)		(840	)		(534	)		(158	)		(885	)		(2,320	)		(4,292	)		(1,437	)		(12,612	)
Recoveries		190			573			4			-			12			141			127			4			1,051
Net charge-offs		(1,956	)		(267	)		(530	)		(158	)		(873	)		(2,179	)		(4,165	)		(1,433	)		(11,561	)
Balance at period end	$	7,586		$	9,027		$	4,756		$	7,372		$	836		$	5,281		$	11,198		$	3,664		$	49,720

Total loans and leases	$	226,528		$	141,576		$	357,358		$	519,837		$	8,484		$	360,287		$	440,606		$	90,727		$	2,145,403
Allowance for loans and leases to total loans and leases ratio		3.35	%		6.38	%		1.33	%		1.42	%		9.85	%		1.47	%		2.54	%		4.04	%		2.32	%

Balance of loans specifically evaluated for impairment	$	9,949		$	24,481		$	16,118		$	12,556		na.			$	35		$	4,000		$	2,596		$	69,735
Allowance for loans specifically evaluated for impairment	$	1,234		$	836		$	137		$	1,175		na.			na.			$	597		$	1,053		$	5,032
Specific allowance to specific loans ratio		12.40	%		3.41	%		0.85	%		9.36	%	na.			na.				14.93	%		40.56	%		7.22	%

Balance of loans collectively evaluated	$	216,579		$	117,095		$	341,240		$	507,281		$	8,484		$	360,252		$	436,606		$	88,131		$	2,075,668
Allowance for loans collectively evaluated	$	6,352		$	8,191		$	4,619		$	6,197		$	836		$	5,281		$	10,601		$	2,611		$	44,688
Collective allowance to collective loans ratio		2.93	%		7.00	%		1.35	%		1.22	%		9.85	%		1.47	%		2.43	%		2.96	%		2.15	%

The following table presents the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged-off at the dates indicated:

At September 30, 2011			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
Accruing	$	-	$	-	$	-	$	-	$	-	$	-
Non-accruing		1,644		2,790		464		2,610		1,178		8,686
Restructured accruing		1,375		-		-		709		3,433		5,517
Restructured non-accruing		482		6,608		785		3,311		392		11,578
Balance	$	3,501	$	9,398	$	1,249	$	6,630	$	5,003	$	25,781

Allowance	$	1,234	$	836	$	137	$	1,175	$	1,650	$	5,032

Impaired loans without a specific allowance
Accruing	$	-	$	-	$	-	$	-	$	-	$	-
Non-accruing		3,654		10,035		14,192		5,039		-		32,920
Restructured accruing		536		-		-		-		35		571
Restructured non-accruing		2,258		5,048		677		887		1,593		10,463
Balance	$	6,448	$	15,083	$	14,869	$	5,926	$	1,628	$	43,954

Total impaired loans
Accruing	$	-	$	-	$	-	$	-	$	-	$	-
Non-accruing		5,298		12,825		14,656		7,649		1,178		41,606
Restructured accruing		1,911		-		-		709		3,468		6,088
Restructured non-accruing		2,740		11,656		1,462		4,198		1,985		22,041
Balance	$	9,949	$	24,481	$	16,118	$	12,556	$	6,631	$	69,735

Unpaid principal balance in total impaired loans	$	12,312	$	43,804	$	16,372	$	13,266	$	-	$	85,754

At December 31, 2010			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
Accruing	$	-	$	-	$	-	$	-	$	-	$	-
Non-accruing		4,755		4,792		1,175		3,060		-		13,782
Restructured accruing		-		-		-		-		-		-
Restructured non-accruing		627		2,664		-		1,873		-		5,164
Balance	$	5,382	$	7,456	$	1,175	$	4,933	$	-	$	18,946

Allowance	$	2,507	$	289	$	274	$	775	$	-	$	3,845

Impaired loans without a specific allowance
Accruing	$	-	$	6,383	$	-	$	-	$	-	$	6,383
Non-accruing		916		12,076		578		6,119		-		19,689
Restructured accruing		209		4,545		3,878		710		1,229		10,571
Restructured non-accruing		1,640		10,885		-		729		771		14,025
Balance	$	2,765	$	33,889	$	4,456	$	7,558	$	2,000	$	50,668

Total impaired loans
Accruing	$	-	$	6,383	$	-	$	-	$	-	$	6,383
Non-accruing		5,671		16,868		1,753		9,179		-		33,471
Restructured accruing		209		4,545		3,878		710		1,229		10,571
Restructured non-accruing		2,267		13,549		-		2,602		771		19,189
Balance	$	8,147	$	41,345	$	5,631	$	12,491	$	2,000	$	69,614

Unpaid principal balance in total impaired loans	$	10,929	$	63,811	$	5,631	$	12,171	$	-	$	92,542

The Company had commitments to lend $2.5 million in additional funds on loans that have been restructured at September 30, 2011. At December 31, 2010, the Company had commitments to lend $4.5 million in additional funds on loans that have been restructured.

The following table provides information regarding impaired loans for the period indicated:

For the Nine Months Ended September 30, 2011			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	9,564	$	32,666	$	8,576	$	13,211	$	4,871	$	68,887
Contractual interest income due on impaired loans during the period	$	479	$	1,496	$	445	$	682	$	690
Interest income on impaired loans recognized on a cash basis	$	186	$	397	$	26	$	374	$	133
Interest income on impaired loans recognized on an accrual basis	$	87	$	-	$	-	$	34	$	129

The following table provides summary information regarding impaired loans for the periods or at the dates indicated:

(In thousands)	September 30, 2011		December 31, 2010
Impaired loans with a valuation allowance	$	25,781	$	18,946
Impaired loans without a valuation allowance		43,954		50,668
Total impaired loans	$	69,735	$	69,614

Allowance for loan and lease losses related to impaired loans	$	5,032	$	3,845
Allowance for loan and lease losses related to loans collectively evaluated		44,688		58,290
Total allowance for loan and lease losses	$	49,720	$	62,135

	Nine Months Ended		Year Ended
	September 30, 2011		December 31, 2010
Average impaired loans for the period	$	68,887	$	75,556
Contractual interest income due on impaired loans during the period	$	3,792	$	6,651
Interest income on impaired loans recognized on a cash basis	$	1,116	$	-
Interest income on impaired loans recognized on an accrual basis	$	250	$	524

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at the dates indicated:

At September 30, 2011			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	8,038	$	24,481	$	16,118	$	11,847	$	956	$	1,478	$	6,081	$	5,034	$	74,033
Loans and leases 90 days past due		-		-		-		-		63		373		2,291		-		2,727
Restructured loans and leases (accruing)		1,911		-		-		709		-		35		2,788		645		6,088
Total non-performing loans and leases		9,949		24,481		16,118		12,556		1,019		1,886		11,160		5,679		82,848
Other real estate owned		-		400		462		-		-		-		5,458		1,618		7,938
Total non-performing assets	$	9,949	$	24,881	$	16,580	$	12,556	$	1,019	$	1,886	$	16,618	$	7,297	$	90,786

At December 31, 2010			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
Non-accrual loans and leases	$	7,938	$	30,417	$	1,753	$	11,781	$	1,887	$	300	$	3,946	$	5,305	$	63,327
Loans and leases 90 days past due		19		-		-		-		407		182		9,871		3,675		14,154
Restructured loans and leases (accruing)		209		4,545		3,878		710		-		37		1,192		-		10,571
Total non-performing loans and leases		8,166		34,962		5,631		12,491		2,294		519		15,009		8,980		88,052
Other real estate owned		-		1,172		-		-		-		-		6,799		1,522		9,493
Other assets owned		-		-		-		-		-		200		-		-		200
Total non-performing assets	$	8,166	$	36,134	$	5,631	$	12,491	$	2,294	$	719	$	21,808	$	10,502	$	97,745

At September 30, 2011			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	1,132	$	-	$	568	$	2,608	$	224	$	790	$	4,090	$	1,219	$	10,631
61-90 days		254		-		6,513		-		47		184		655		-		7,653
> 90 days		-		-		-		-		63		373		2,291		-		2,727
Total past due		1,386		-		7,081		2,608		334		1,347		7,036		1,219		21,011
Non-accrual loans and leases		8,038		24,481		16,118		11,847		956		1,478		6,081		5,034		74,033
Current loans		217,104		117,095		334,159		505,382		7,194		357,462		427,489		84,474		2,050,359
Total loans and leases	$	226,528	$	141,576	$	357,358	$	519,837	$	8,484	$	360,287	$	440,606	$	90,727	$	2,145,403

At December 31, 2010			Commercial Real Estate										Residential Real Estate
							Commercial
			Commercial		Commercial		Owner						Residential		Residential
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans and leases
31-60 days	$	2,294	$	-	$	347	$	156	$	298	$	1,685	$	4,720	$	-	$	9,500
61-90 days		20		-		-		108		21		385		1,593		-		2,127
> 90 days		19		-		-		-		407		182		9,871		3,675		14,154
Total past due		2,333		-		347		264		726		2,252		16,184		3,675		25,781
Non-accrual loans and leases		7,938		30,417		1,753		11,781		1,887		300		3,946		5,305		63,327
Current loans		239,984		120,644		325,682		491,241		12,938		377,938		416,404		82,293		2,067,124
Total loans and leases	$	250,255	$	151,061	$	327,782	$	503,286	$	15,551	$	380,490	$	436,534	$	91,273	$	2,156,232

The Company evaluates its commercial credits under an internal loan risk rating system as a means of identifying problem or potential problem loans. The following table provides information by credit risk rating indicators for each segment of the commercial loan portfolio at the dates indicated:

At September 30, 2011			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Loan Classification:
Risk Free to Marginally Acceptable	$	189,812	$	112,650	$	312,623	$	463,242	$	1,078,327
Special Mention		7,456		1,366		17,529		27,136		53,487
Substandard		27,499		27,560		27,206		29,459		111,724
Doubtful		1,761		-		-		-		1,761
Total	$	226,528	$	141,576	$	357,358	$	519,837	$	1,245,299

At December 31, 2010			Commercial Real Estate
							Commercial
			Commercial		Commercial		Owner
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Total
Loan Classification:
Risk Free to Marginally Acceptable	$	205,111	$	107,374	$	294,134	$	425,433	$	1,032,052
Special Mention		11,324		2,342		23,742		44,035		81,443
Substandard		30,330		39,546		9,906		33,497		113,279
Doubtful		3,490		1,799		-		321		5,610
Total	$	250,255	$	151,061	$	327,782	$	503,286	$	1,232,384

Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to those pools is based on their delinquency status. The following table provides information by credit risk rating indicators for those remaining segments of the loan portfolio at the dates indicated:

At September 30, 2011					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Loan Classification:
Performing	$	7,465	$	358,401	$	429,446	$	85,048	$	880,360
Non-performing:										-
90 days past due		63		373		2,291		-		2,727
Non-accruing		956		1,478		6,081		5,034		13,549
Restructured loans and leases (accruing)		-		35		2,788		645		3,468
Total	$	8,484	$	360,287	$	440,606	$	90,727	$	900,104

At December 31, 2010					Residential Real Estate
					Residential		Residential
(In thousands)	Leasing		Consumer		Mortgage		Construction		Total
Loan Classification:
Performing	$	13,257	$	379,971	$	421,525	$	82,293	$	897,046
Non-performing:
90 days past due		407		182		9,871		3,675		14,135
Non-accruing		1,887		300		3,946		5,305		11,438
Restructured loans and leases (accruing)		-		37		1,192		-		1,229
Total	$	15,551	$	380,490	$	436,534	$	91,273	$	923,848

During the first nine months ended September 30, 2011, the Company restructured $6.9 million in loans. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the recorded investment in the associated loan balances. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan. Loans restructured in the first nine months of 2011 have specific reserves of $1.6 million at September 30, 2011. The following table provides information on restructured loans for specific segments of the loan portfolio at the date indicated:

	For the Nine Months Ended September 30, 2011
			Commercial Real Estate
							Commercial		All
			Commercial		Commercial		Owner		Other
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans
Troubled debt restructurings
Restructured accruing	$	1,730	$	-	$	-	$	-	$	2,751
Restructured non-accruing		-		-		676		1,320		382
Balance	$	1,730	$	-	$	676	$	1,320	$	3,133

Specific allowance	$	292	$	-	$	-	$	537	$	818

Restructured and subsequently defaulted	$	-	$	-	$	-	$	-	$	460

Other Real Estate Owned

OREO is comprised of properties acquired by the Bank in partial or total satisfaction of problem loans. The properties are initially recorded at fair value on date of acquisition less estimated costs of disposal (net realizable value). Losses existing at the time of acquisition of such properties are charged against the allowance for loan and lease losses. Subsequent write-downs that may be required are expensed as incurred. Improvements to the properties may be capitalized if the improvements increase the overall value of the property. Amounts may not be capitalized in excess of the net realizable value of the property. Gains and losses realized from the sale of OREO, as well as valuation adjustments, are included in non-interest expense. Expenses of operation are included in non-interest expense. Other real estate owned totaled $7.9 million and $9.5 million at September 30, 2011 and December 31, 2010, respectively.